U.S. financial monitor says Brexit's effects could be felt for years

WASHINGTON (Reuters) - Recent market volatility inspired by Britain's vote last month to leave the European Union is dissipating, but the decision known as Brexit could have effects for years, the U.S. Office of Financial Research, which monitors financial stability, said on Thursday.

"Although the immediate market volatility has subsided, the policy uncertainty and the ultimate financial and political spillovers may last for months or years, leaving markets vulnerable to further confidence shocks," it wrote in a quarterly review of markets.

Primarily, negotiations will stretch on for years, and the results may have far-reaching legal and economic implications for the United Kingdom's financial industry, as well as for foreign investment in the country, the report said.

U.S. regulators rely on the office, created by the Dodd-Frank Wall Street reform law, for research and risk analyses that will help them prevent another financial meltdown on the magnitude of the 2007-09 crisis.

Investors sought shelter from the market turmoil in bonds after Britain's referendum, sending long-term interest rates in the United States, the United Kingdom and Germany to historic lows, according to the report.

Meanwhile, global equities lost an estimated $3 trillion in market value in two days and a rebound in oil prices came to a halt.

Since then, volatile investments known as risk assets have rebounded sharply in the United States, and equities in Europe have recovered more than half their declines, according to the report.

"Expectations of policies aimed at countering any post-referendum fallout and at shoring up the Japanese economy provided strong support for risk assets in the past two weeks. The yen <JPY=> in particular has retraced all of its post-referendum safe-haven rally," the report said.